Renasant Corporation — 2011 Form 10-K
Business context and period. Renasant is a regional bank holding company operating through Renasant Bank and Renasant Insurance in Mississippi, Tennessee, Alabama and Georgia. It also provides wealth-management services. This filing covers the fiscal year ended December 31, 2011; the fourth-quarter figures below are unaudited. Dollar amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Net interest income | $129.1 | $105.1 | Up 22.9%; tax-equivalent net interest margin increased to 3.77% from 3.26%. |
| Provision for loan losses | $22.4 | $30.7 | Down 27.1%. |
| Noninterest income | $68.6 | $95.9 | Down 28.5%, principally reflecting a smaller acquisition gain. |
| Noninterest expense | $140.7 | $123.6 | Up 13.8%, including expansion, higher OREO costs, acquisition expenses and debt-prepayment penalties. |
| Income before taxes | $34.7 | $46.7 | Down 25.7%. |
| Net income / diluted EPS | $25.6 / $1.02 | $31.7 / $1.38 | Net income down 19.1%; 2010 included a $42.2 acquisition gain. |
| Cash from operating activities | $153.1 | $100.5 | Cash and cash equivalents ended the year at $209.0, down from $292.7. |
- Fourth quarter: net income was $5.8 million and diluted EPS was $0.23, versus $4.7 million and $0.19 in Q4 2010. Q4 2011 net interest income was $32.5 million and provision for loan losses was $6.0 million.
- Balance sheet: total assets were $4.20 billion, loans $2.58 billion, deposits $3.41 billion and shareholders’ equity $487.2 million at year-end. Loans grew 2.2%; deposits declined 1.6% from year-end 2010.
- Credit quality: net charge-offs were $23.4 million, or 0.91% of average loans, versus $24.4 million, or 1.00%, in 2010. The allowance was $44.3 million, or 1.98% of loans. Nonperforming loans excluding FDIC-covered loans were $34.9 million (1.56% of loans), down from $53.9 million (2.46%). Including covered assets, reported nonperforming loans were $124.1 million and total nonperforming assets were $250.1 million.
- Funding and debt: total deposits were $3.41 billion; noninterest-bearing deposits increased to $531.9 million, while higher-cost time deposits ran off. Short- and long-term borrowings totaled $254.7 million, down from $316.4 million. The $50 million FDIC-guaranteed senior note matures in 2012.
- Capital: Renasant Bank was classified as well capitalized. At year-end, its Tier 1 leverage ratio was 9.26%, Tier 1 risk-based capital ratio 13.07%, and total risk-based capital ratio 14.32%. Company equity-to-assets was 11.59%.
- Margins and efficiency: return on average assets fell to 0.60% from 0.80%, and return on average equity to 5.34% from 7.16%. The efficiency ratio was 69.04% versus 59.97%; excluding acquisition gains, it was 72.36% versus 75.42%.
Material changes versus 2010
- Renasant acquired specified assets and assumed liabilities of American Trust Bank in Georgia in February 2011, recording an $8.8 million pretax bargain-purchase gain. The FDIC loss-share agreements cover eligible losses on acquired assets at 80%, subject to contractual terms.
- The company acquired RBC Bank (USA)’s Birmingham-based trust business in August, bringing approximately $680 million of assets under management and recording a $0.6 million gain. Wealth-management revenue and reported trust assets under management rose.
- Growth in commercial real estate loans lifted that category to 51.79% of total loans from 49.11%. Management continued reducing construction and land-development exposure; construction and land-development loans declined to 13.10% of the portfolio from 15.72%.
- Funding costs fell as the company shifted from borrowings and higher-cost deposits toward lower-cost deposits. Interest expense declined 31.3%, while interest income increased 3.1%.
- OREO expense increased to $15.3 million from $9.6 million, including $8.2 million of write-downs; OREO stood at $113.2 million, down from $126.5 million.
- The company recorded $15.4 million of gross other-than-temporary impairment on available-for-sale securities, offset by $15.2 million recognized in other comprehensive income; the resulting net impairment loss in earnings was $0.3 million. Pooled trust preferred securities had $30.4 million cost and $12.8 million fair value and were on nonaccrual.
Outlook, commentary and risks
- Management said it expects the efficiency ratio to improve as it replaces fee income affected by regulatory changes and credit costs decline if credit quality improves. The filing provides no specific earnings, revenue or margin guidance.
- Management anticipated only marginal economic recovery in its markets, with possible further deterioration. It planned to continue de novo expansion and evaluate acquisition opportunities, while emphasizing core-deposit growth and continued reduction of construction and land-development concentrations.
- Key exposures include commercial real estate and broader real-estate collateral concentrations: 51.79% of loans were commercial real estate and 86.88% of loans had real estate as a primary or secondary collateral component. Weak local economies, collateral-value declines and borrower stress could increase provisions and charge-offs.
- Other material risks include interest-rate and liquidity sensitivity, acquisition integration and FDIC loss-share compliance, competitive pressure, regulatory changes (including Dodd-Frank), and potential increases in FDIC assessments. The company noted that dividends depend substantially on permitted transfers from the Bank.
- Unusual items included acquisition gains of $9.3 million in 2011, $1.9 million of FHLB debt-prepayment penalties, and acquisition-related expenses of $1.7 million. Management reported no material pending legal proceedings; the independent auditor issued an unqualified opinion and management assessed internal control over financial reporting as effective.
Important facts for investors to verify
- Whether improvement in nonperforming loans excluding covered assets persists, and how much credit risk remains in acquired covered loans, OREO and restructured loans.
- The adequacy of the $44.3 million allowance and the sensitivity of credit losses to commercial real estate values and local economic conditions.
- How much reported earnings depended on acquisition gains, securities activity and FDIC loss-share accounting, and whether core fee income can offset regulatory-related pressure.
- Deposit trends and liquidity after runoff of higher-cost deposits, the 2012 $50 million note maturity, and the terms and availability of backup funding.
- Execution and profitability of recent acquisitions and new branches, including realization of anticipated benefits and ongoing FDIC reimbursement obligations.
- Interest-rate exposure: the company’s year-end model projected net interest income up 2.71% and economic value of equity up 13.87% under an immediate 200-basis-point increase; actual results may differ because the model depends on assumptions.